Riassunto analitico
The idea that monetary policy might have nonlinear and asymmetric effects on both prices and economic activity has a long history in economics. In particular, distinguished economists have argued that a restrictive policy might be more effective than an expansionary one, the latter being similar to “pushing on a string”.
In this work we propose a simple method to identify the non-linear effects of monetary policy. Our approach is divided into two phases: in the first step we identify and estimate the monetary policy shock with a standard recursive VAR; in the second step, we estimate a VARX (i.e. a VAR with exogenous variables) including as the exogenous variables the policy shock found before and its square, in order to see whether there are quadratic effects or not.
We find that there are significant quadratic effects. As a result, the effects of monetary policy are asymmetric: a contractionary policy has a strong adverse effect on output, unemployment and inflation, whereas an expansionary policy has little effect. This finding provides a clear-cut empirical confirmation for the “string” metaphor.
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